Breathing space for home loan borrowers

Home loan borrowers may be getting some respite from higher interest rates from an unusual quarter, amid buoyant economic conditions that might normally warrant further rates hikes.

The Reserve Bank (RBA) is likely to be more inclined to hold fire on further interest rate rises currently, given the tighter conditions prevailing in lending markets following the collapse in the US sub-prime lending market. Apart from the general uncertainty and potential dent in economic confidence, it has also caused banks to be very wary about lending to each other and they've raised wholesale interest rates to compensate.

This has to flow on to retail and commercial lending in some way and is already pushing up business loan rates, especially for shorter term financing, where interest rates are on the rise independent of any RBA moves in the official cash rate. For the business sector, there has already been the equivalent of an extra rate rise following the August official rise across the board by the RBA.

This may be in fact just the way RBA would prefer it at the moment – higher interest rates for business but not for home borrowers. Afterall, it's businesses driving our stellar rate of economic growth at the moment, not the housing market which has remained sluggish this year in the face of debt-burdened households and low housing affordability.

Monetary policy, the adjustment of official interest rates, is a very blunt instrument of economic management – one adjustment of rates impacts on virtually the entire economy. But in the current situation, the RBA is enjoying the luxury of seeing interest rates moving higher in that part of the economy that it wants to rein in, leaving more vulnerable parts alone (except probably the poor old farmers).

There is talk of lenders eventually having to raise home loan interest rates too, but this is less than certain. There is no more competitive lending market than that for home loans and, while some increases have already been seen, banks and smaller lenders alike will generally be trying and see through the credit crunch before hiking rates. There are no guarantees, however, and the longer the tight credit market conditions continue the harder it will be for lenders to contain home rates.

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